LOW PRICES THREAT
Investment in US shale oilfields will fall by a tenth next year – and result in a decline in production – if the oil price continues to trade around $80 a barrel, the world's energy watchdog has warned.
Wednesday's forecast from the International Energy Agency is the clearest sign yet of the potential impact of the sharp drop in the price of Brent crude, in the wake of booming US oil production.
Fatih Birol, chief economist of the IEA, said that if the price of crude remained near this week's four-year low, "there could be a 10 per cent decline in US light tight oil, or shale, investment in 2015 [from full-year 2014 levels]".
Speaking at the launch of the IEA's annual World Energy Outlook report, he added: "I wouldn't be surprised to see statements from different companies in the weeks and months to come [outlining a change in] their investment plans and reducing budgets for investments in North America . . . especially the United States."
Such a reduction in investment would lead to a decline in production in the medium term, the IEA said, although it did not give any details about the drop in output or changes to its forecasts.
A more than 30 per cent fall in the price of Brent since mid-June, to below $80 on Wednesday, has hit the share prices of shale oil explorers in the US and caused jitters in countries that rely heavily on oil revenues to fill government coffers, such as Russia.
Mr Birol's comments also chime with recent remarks from the secretary-general of Opec, who expects a sharp reduction in higher cost production such as US shale if the price of crude oil remains at current levels.
But they are at odds with many industry watchers, who say shale producers have a break-even price – the level at which they can remain profitable – that is much lower than today's levels.
However, the IEA does not consider lower investment in US shale to be the biggest threat facing the oil industry. It said on Wednesday it was more concerned about the prospect of wider output shortfalls in 2020 and beyond.
As US shale oil production starts to level off at the start of the next decade, the gap will need to be filled – but the IEA has warned that developing Brazil's deepwater fields will be a complex and capital-intensive process, while investment in Iraqi output may be hindered by security concerns.
"The apparent breathing space provided by the rise in non-Opec output over the next decade is in many respects illusory, given the long lead times of new upstream projects," the agency's report said.
World oil supply is expected to rise by 14m barrels a day to 104m barrels a day in 2040, the IEA has forecast, but this will depend on timely investments in the Middle East. Iraq is expected to deliver half of Opec's oil production growth in the coming years, but the security situation has led the IEA to reduce its own estimates. It now expects Iraq to produce 4.6m b/d by 2020, against a previous forecast of 5.8m b/d.
"If this investment is not made in time . . . tighter and more volatile oil markets lie ahead," the IEA said.
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